Today's Idea

A quick look at the daily chart for May Natural Gas shows strong resistance near the 3.000 level. Some traders who are expecting this resistance level to hold may wish to explore selling call credit spreads in Natural Gas futures options with strike prices at or above this important resistance area. For example, with May Gas trading at 2.850 as of this writing, the May 3.000 calls could be sold and the May 3.300 calls bought for a net-credit of 0.075, or $750 per spread, not including commissions. The premium received would be the maximum potential profit on the trade, which would be realized at option expiration in late April should the May futures be trading below 3.000.

Fundamentals

The one-way bearish trend in Natural Gas futures has taken a well deserved breather, as prices have moved into a consolidation mode during the past few weeks. Fundamentally, the outlook still favors the bears, with well above normal winter temperatures curtailing demand for Gas used for heating. The weather outlook going into March is still calling for above normal temperatures throughout the eastern half of the U.S., giving Gas bulls little hope for any significant drawdowns of Gas from storage as the end of winter approaches. U.S. Gas inventories are nearly 40% higher than the 5-yer average for this time period, and unless U.S. gas production is curtailed, it is possible that we could run out of storage room later this year. Despite this bearish outlook, prices seem to have stabilized the past few weeks, with some analysts looking for increased gas usage from power generators -- especially those with the ability to switch from coal to natural gas for its fuel needs. Bullish analysts also cite the potential for further production cuts later in the year should less profitable drilling operations finally shut down as a result of low price levels. However, it looks like short-covering buying coming from large speculative traders, who are holding a combined net-short short position of 126,398 contracts as of February 14th, according to the Commitment of Traders report that may be behind the recent price recovery. With prices no longer making new lows on a daily or weekly basis recently, these large speculators may be moving funds out of the Natural Gas market and into other markets that are exhibiting better technical trends. If true, then the current price rally may end up to be short-lived once the short-covering buying begins to wane and commercial producers take advantage of any price gains to establish short-hedges against current and mid-term production levels.

Technical Notes

Looking at the daily chart for April Natural Gas, we notice prices moving into a much narrower consolidation pattern, with prices moving into a series of lower highs and higher lows. Prices are now holding above the 20-day moving average (MA) but remain below the 50-day MA, further offering conflicting signals for short and medium-term momentum traders. The 14-day RSI has remained near neutral territory, with a current reading of 49.02. Given the current tight trading ranges, near-term support is seen at the 20-day MA, currently near 2.706, with near-term resistance found at the 50-day MA, currently near 2.935.



Mike Zarembski, Senior Commodity Analyst

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